The end of big bundles? Going "a la carte" via OTT

OK, first let me take care of clarifying the terminology.

Assembling big (often 50+ channels) bundles of cable networks has been the primary strategy of multichannel video service providers (cable, DBS, telco cable, etc.) for the last couple of decades. Keeping bundles big helps minimize transaction costs for the bundler, while offering maximal potential audience reach for advertisers, and maximizing the viewer's ability to browse and discover the value of channels and their content.  On the other hand, critics complain that it "forces consumers to purchase channels they aren't interested in."  That's not necessarily true, as purchase decisions are based on the aggregate perceived value of the bundle, not the "costs" of undesired channels (see here for more detailed analysis).

Still, as the networks and local stations seek to increase licensing fees from multichannel providers, those costs are passed on to the consumer in the form of higher bundle prices.  Bundle subscription costs are rising rapidly, and may be nearing a threshold point for many subscribers - the point where their perceived value of the bundle is less than the subscription price.  We're seeing the beginning of this in the rise of cord-cutters - those replacing paid multichannel access with a combination of online and free over-the-air TV sources.

However irrelevant, the claim of paying for unwanted channels is a major theme for those who would prefer to force multichannel services to unbundle channels and offer them to consumers in small focused bundles (like the various Discovery channels), or individually (i.e. "a la carte").  This may seem to be a good deal for consumers - until you realize that going a la carte will, in most cases, reduce audience reach numbers significantly.  One study (discussed here) forecast that forced unbundling could result in a loss of 60% of advertising revenues for cable networks, and result in more than 100 channels going out of business.  And since cable networks would need to significantly increase their a la carte prices to recapture some of those losses, going a la carte would also likely result in higher total costs for cable network access for most consumers.

Meanwhile, some multichannel video providers are finding that the increased licensing demands made by some networks are crossing that value threshold, and are dropping channels, or in one case offering to provide the channel - but only as an a la carte service.  The networks have so far been smart enough to realize that either option is a net loss for them, but the gleam of a licensing El Dorado of unlimited wealth keeps them trying to push licensing fees ever higher.  Viacom, and its package of networks, is the latest battleground, with their channels being dropped by a number of mid-range and smaller cable systems unwilling to cave into their licensing demands.  As one analyst noted,

“The stage is set... As consumers are less interested in large bundles, somebody is going to get hurt in the process by asking for too much.”

If multichannel service providers remained the only option for access, the impact on the industry would be bad enough.  However, they're facing rapid growth in the ability of broadband internet connections to provide access to high-quality TV streams to mobile devices and wired connected devices.  The term OTT (over-the-top) refers to these alternative sources of video and TV content. Both the diffusion and use of these technologies for TV viewing are growing rapidly (see here and here).  Combined with increased time-shifting of programs and place-shifting, audience TV viewing habits are clearly changing.  For cable networks, going online for their content distribution - either as single channels or as a part of a more limited (and much less expensive) bundle offered online - is an increasingly viable supplement, and potential substitute, for traditional delivery media.

The viability of online TV delivery has been a significant component of the "TV Everywhere" marketing push.  The initial conceptualization, though, saw "TV Everywhere" as a way of achieving multichannel services beyond the household's TV sets - and not as a substitute or replacement for those services.  That was one reason for the rapid reaction to the Aereo service.  One would think that local stations and networks would be eager to extend their range of service via mobile as a way of enhancing (or at least maintaining) audience reach.  However, it seemed that the industry hated the notion of a video service that paid no licensing fees; and the courts bought that argument.

More recently, the industry has seen several TV networks pursue the option of offering their programs and content online. The WWE initiated a very successful online subscription service last year, and many of the Pay TV networks have announced plans for providing online access channels separate from multichannel provider subscriptions.  HBO, in particular, is scheduled to provide a separate online channel called HBO Now starting April 12, 2015.  A research report released in January by Park Associates suggested that HBO Now could generate an additional 15 million subscribers.  More critically for multichannel providers, half of those interested in HBO Now said they'd not only be likely to drop HBO pay channels, they'd drop the whole multichannel pay service (about 7 million subscribers).  That's still a big win for HBO, who not only would likely net an added 8 million subscribers, but would not have to split the subscription fee with the multichannel provider.

In addition, CBS has been offering an online video service since last fall, and it is thought that ABC, NBC, and ESPN are considering taking their online video channels public (currently access is limited to subscribers of some of the largest multichannel providers).  Most cable networks provide some access to their content, but not to live streams of the channel.

Still, it's likely that the new DishTV service, Sling-TV, may unleash the deluge.  Sling-TV is an OTT service that bundles a number of the most popular cable networks as a minibundle at a very low subscription price ($20/mo. for about 20 channels), and supplements that with targeted minibundles (sports, movies, children, etc.) at $5 a pop.  The service combines live streams of the network, as well as on-demand access to the previous week's programs. Sling-TV has managed to sign up some 100,000 subscribers in its first month, despite being initially limited to those with a Roku OTT box.

The Sling-TV service could well force the big multichannel services to start unbundling.  It offers an intriguing alternative for those who would be satisfied with a lesser selection of channels.  And even for those viewers who place high value on channels not included in the Sling TV packages, the price contrast between the "big bundle" options ($50-$150+ on new subscriber deals) and Sling-TV will prompt consumers to reconsider if their demand for favorite channels will justify the price differential (and to wonder how the costs of channels they don't want inflate bundle prices).

The big multichannel providers have been shedding TV subscribers slowly, but consistently, for years.  Now that viable and less costly OTT and online video options are coming available, expect the decline in pay TV subscribers to increase, particularly for major MSOs and multichannel providers.

Sources - Updating: HBO Now The Big Test for Cord Cutters?, Online Video Daily VidBlog
Sling TV notches 100,000 users in a month, TechHive
Seventeen percent of U.S. broadband households are likely to subscribe to an OTT HBO service, Parks Associates report.
Provider's Dispute with Viacom Highlights Skirmish Over the Cable Bundle, New York Times

Copyright Decision on Aereo

Aereo is a recent technology service that offered online access to local TV broadcasts in selected markets in the U.S.  For a fee, they grabbed programs that a subscriber requested, from "free" over-the-air local broadcasters, digitally converted the broadcast into a IP stream that was sent directly to the subscriber's connected device.

And when TV networks and cable systems  heard about it, they sought to pre-emptively ban it.  Cable because it was a much cheaper alternative to a service they sought to provide.  The networks' objection was pithily stated by one network CEO: "If anyone makes money from local broadcasts, we demand a share of it."  A consortium of networks and MSOs filed suit claiming that Aereo violated copyright law and seeking an immediate injunction against deploying the system; however, the judge in that case ruled against an injunction as Aereo offered a reasonable argument that its service was not a violation of copyright - but did not initially rule on the viability of that argument.  Both parties wanted to expedite matters, so they sought to bring the case to the Supreme Court to get a final ruling on the basic copyright issues.

Copyright law is fairly simple, yet complex.  The law gives the owner of the copyright the legal authority to determine the conditions under which the copyrighted material is made available to others.  It also, however, permits a "fair use" exemption under certain general conditions - allowing others to access and use the content under restricted conditions.  The rise of broadcasting created an issue, however - what counts as a "copy"?  This came to a head with the rise of cable systems, and their retransmission of over-the-air broadcast signals from local (and eventually distant) stations.  As a result, Congress amended copyright law to include "public performance" of audiovisual signals, and specifically applied that term to carriage ("retransmission") of over-the-air television broadcasts. 

Around the same time, the Supreme Court issued a ruling on what behaviors were considered "fair use" of audio and video content.  Specifically, they ruled that - for legally acquired content - individuals could record content for their later use (time-shifting), transfer and translate content for use in different locals or on different devices (place-shifting), and make a back-up (archive) copy, but only for their own use.

Aereo's service was designed to fit those "fair use" guidelines and the "free" nature of over-the-air broadcasting (stations are prohibited from charging viewers for access to public broadcasts).  Each Aereo subscriber was assigned their own antenna for receiving the free broadcasts, and unlike cable, content was not retransmitted unless specifically requested by that subscriber, and was made available only to the device the subscriber sent the request from.  Aereo argued that they were not engaging in a public performance, but a private one that essentially amounted to the time-shifting and place-shifting aspects of fair use.

The big media consortium (ABC et al.) argued that the Aereo service was simply a retransmission service, and was engaged in "public performance" because it offered its service to the public at large.  Therefore, Aereo was in violation of U.S. copyright law.

The recent Supreme Court ruling (6-3) was that Aereo's service was "substantially similar" to cable, because it offers a service that allows subscribers to watch TV programs, and that it is a "public performance" because several subscribers may be watching the same program, thus constituting a "public."

It's not terribly surprising, although it is disappointing, that the majority decision is technologically ignorant and focuses on outcomes rather than processes and behaviors.  To the majority, any technology that delivers TV programs to members of the public is essentially no different than a cable system and thus any retransmission right for that content must be granted by the copyright owner (presumably, but not necessarily, for a fee).  In addition, the majority nonsensically assumes that since the copyright act does not explicitly define "public", it is any group of individuals beyond what may be watching on a single device. The majority also finds that it makes no difference who is initiating and controlling the retransmission - an individual subscriber or a cable system; rather, they shift the focus to Aereo because it offers a "service."

There is a weird yet nonsensical example given, where the majority suggests that Aereo's problem is that it doesn't provide a service to the copyright owners, but to the public.  The majority repeatedly focuses on copyright owner's right to set the terms of "performance" or consumption.  This ignores the fact that, under law and the terms of their licenses, local broadcasters must provide their copyrighted content freely and without restriction to the public.  Not only to those watching live at home on a TV set, or through a cable system paying retransmission fees; the viewer, or Aereo subscriber, already has the legal right to view or listen to broadcast content.  The copyright owners have already been paid for that performance by the broadcaster - the majority seems to think that viewers need to pay a second time to engage in time-, place- or device-shifting.

The majority decision argues that this ruling does not prejudge future technologies, saying that it is not their intent.  It's hard, though, to see how this is possible, when the decision sets down three extremely broad definitions - 1) that any system for delivering TV content to consumers is "substantially similar" to cable and thus subject to cable's rules; 2) that any group of individuals is considered to be "the public"; and 3) that the driving purpose is not protection of a copyright owner's rights, but the networks "right" to offer a "public performance" of copyrighted material.  Combine that with the majority decision's total disregard for the specific elements of technology and service offered by Aereo - and thus not providing any hook for a narrow argument - and you set a precedence for overreach.

Further, this case offered the opportunity to re-examine which activities are covered by "fair use."  In light of the wretched quality of the decision, I'm relieved that this Court didn't take up that opportunity.

The dissent shreds the majority decision, arguing that the service provided by Aereo was not even a "performance" as defined by copyright law, much less a "public performance."  Rather than looking at the end stage of the service (providing TV programs to viewers) and making an indefensible leap to equate it with cable, the dissent treats Aereo as an Internet content delivery system.  And supports their argument by actually looking at what the service does, then examining the actual case law relevant to those actions (rather than relying on problematic anecdotes).  The dissent eviscerates the majority's "looks like" argument, noting how it conflicts with other recent decisions (including some authored by the same Justice who wrote the majority decision), and ignores both the question of the type of copyright violation being considered (primary, secondary violation, and whether Aereo is acting as an ISP and thus exempt), as well as the issue of "fair use" and the role of the subscriber (not the system) in selecting content for viewing.

The majority decision has turned a copyright case into a "performance" result, achieved only with mystical inference of Congressional intent, over-broad definitions of "public" & "performance", and a "looks like a duck" equivalence of two video delivery systems that could hardly be more polar opposites in technology and operation.  And by doing so, making the application of copyright to new technologies and content delivery systems even more problematic for the future.

And of course, the TV & cable industry hailed the decision, seeing a potential source of revenues (or a protection of current retransmission rights fees).  However, that's likely to be a short-term and low-value source for broadcasters and networks for two reasons - first, that while they think they're soaking the service operator for these revenues, eventually viewers will figure out that stations and broadcast networks are asking them to pay for "free TV"; second, that it's the content that generates the value for viewers, not their "public performance" of that content.  In fact, to the extent that the broadcast "performance" has any value for the station or network, it comes from the broadcast's ability to reach an audience; as such, any mechanism that will extend or expand their reach should be welcomed, rather than challenged.

Sources -  Supremes Rule Against Aereo, Broadcasting & Cable
ABC et al. v. Aereo, Supreme Court decision No. 13-461